Managing for the Long Term: The Error at the Heart of Corporate Leadership

Long-term thinking is in short supply in corporate America these days. But is this changing?

For decades, the ‘Agency’ model of corporate governance has dominated institutional investment and corporate behavior. In this model, the fundamental premise is that management’s objective should be maximizing value for shareholders. Its precepts have come to be widely regarded as a model for “good governance”.

An alternative perspective is emerging. This perspective views ‘the agency model’, the predominant model used by economists and investors, as an extreme version of shareholder centricity that is ‘flawed in its assumptions, confused as a matter of law, and damaging in practice’. Agency theory, in combination with other doctrines of modern economics, has erased the distinctions among investors and converted all of us into speculators.

This article presents the argument for a new perspective on corporate governance and behavior. It recognizes that ‘corporations are independent entities serving multiple purposes and endowed by law with the potential to endure over time and that directors and managers have duties to the corporation as well as to shareholders’.

In the model implied by these propositions, boards and business leaders would take a fundamentally different approach to such basic tasks as strategy development, resource allocation, performance evaluation, and shareholder engagement. For instance, managers would be expected to take a longer view in formulating strategy and allocating resources.

As the authors state, ‘the time has come to challenge the agency-­based model of corporate governance. Its mantra of maximizing shareholder value is distracting companies and their leaders from the innovation, strategic renewal, and investment in the future that require their attention’.

A new model of corporate governance that prioritizes a future perspective recognizes the role of innovation and long-term value creation.